The short-run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditure decreases by $200. The long-run effect of the decrease in government expenditure changes real GDP by
A) nothing; that is, in the long run real GDP equals $8,000.
B) a decrease of $200 because the long-run multiplier is 1.
C) a decrease of 600.
D) an increase of 600.

Question

Quizplus · Accepted Answer

In the long run, real GDP returns to its potential level of $8,000, so the decrease in government expenditure does not change real GDP.

The Short-Run Multiplier Is Equal to 3, Real GDP Equals